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Thinking of calling the market done.
Old 02-08-2013, 02:50 PM   #1
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Thinking of calling the market done.

I am sure this has been discussed over and over. I am 40 yo now and have about 1.2 million in assets in the stock market with a AA utilizing Coffee House style. I am far ahead of where I need to be at my age, and even though I planned on retiring in a few years, I have now been promoted at my job and actually like going to work again. I currently sock away the max to my 401k's and save about 20k extra externally as well. I don't really need any gains anymore and am thinking of just cashing out. My current living expenses are around 38k including taxes. I have 2 years aside from that in cash and can continue to live the same lifestyle that I am happy with. I am seriously thinking that it is time to call the market quits and move to 100% cash and wait for CD's to start to return to the averages again at some point in the future. I plan on working another 10 or so years now given my current job that is very stable and easily transferable to another company in the event of a job loss. I work in high tech field as lead programmer so the ongoing demand is expected to be strong.

My thought is once you have won the game why continue any risk? I understand loss of principal due to inflation, but it looks on paper right now that I could retire with a 3.2% withdrawal rate. Given another 10 years in the industry I my projections will be a 2,144,050.46 ending balance given $45k additions and 3% growth. I know cashing out now will only give 1% growth if I am lucky. But eventually we have to return to the norm.

Thought and Comments?
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Old 02-08-2013, 02:53 PM   #2
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Originally Posted by RetirementColdHardTruth View Post
.......... Given another 10 years in the industry my projections will be a 2,144,050.46 ending balance ..............

Thought and Comments?
How certain are you about the 46 cents?
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Old 02-08-2013, 03:06 PM   #3
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Another thought is to just go more conservative. Don't bail on equities completely, just reduce that portion of you AA. You are so young - if you are lucky that portfolio has to last another 40 years. That is a long, long time.
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Old 02-08-2013, 03:12 PM   #4
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I don't think that going 0 equities is no risk. In your situation, I might substantially reduce equities once I reach my goal. But even so that would probably still be 40% equities. (In actuality, DH is retired and I'm semi-retired and we feel comfortable with 55% equities).
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Old 02-08-2013, 03:16 PM   #5
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If you can accurately predict where the market is going next with 100% accuracy (this is your only retirement portfolio, so you have to be right), you're wasting your time and should be running a mutual fund.

You can't get your required 3.2% WR using CDs now. If history is any guide, by getting out of equities you'll be increasing risk (of running out of money, or at least damaging your portfolio's ability to generate the returns you need), not decreasing it.
The dividend return on equities is about 2%, more if you deliberately pick high dividend stocks. That's a lot better than today's CD rates, and it's entirely independent of how share prices change. If I were in your boots I think I'd realize that I hadn't "won the game" yet, and need the returns stocks have traditionally offered. With 2% dividends and some cash buffer (5-10%?), at your 3.2% WR you could weather a 10 year dip in stock prices without having to sell any of them.
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Old 02-08-2013, 03:16 PM   #6
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Another thought is to just go more conservative. Don't bail on equities completely, just reduce that portion of you AA. You are so young - if you are lucky that portfolio has to last another 40 years. That is a long, long time.
I agree. I like the fact that you're ahead of the game, but you need to look long term. Much as I would rather not, I'm hanging out with my 45% equity position, but I pull it out above that level (rebalance for those preferring formal terms)
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Old 02-08-2013, 03:17 PM   #7
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How certain are you about the 46 cents?

Money Chimp says 100% compounded at 3% with 45k additions. LOL. Math is always exact science, reality is not.
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Old 02-08-2013, 03:17 PM   #8
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Another thought is to just go more conservative. Don't bail on equities completely, just reduce that portion of you AA. You are so young - if you are lucky that portfolio has to last another 40 years. That is a long, long time.
+1

Track all the parts of your portfolio over time along with inflation. Having a balance really does seem to work over the long run.
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Old 02-08-2013, 03:34 PM   #9
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I have always said, only take the risk, you need to take, no more.

Saying that, there is market risk, interest rate risk, inflation risk, so pick your poison.
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Old 02-08-2013, 03:38 PM   #10
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I remember reading a study (Bernstein?) that showed 100% fixed/cash had more risk over time than the same portfolio with 25% equities. I think Benjamin Graham also recommended no less than 25% equities.

Anyone remember the guy who posted here who got out of the market in 2008 and missed the bull run. I don't think he posts any longer.
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Old 02-08-2013, 03:39 PM   #11
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You could always cash out maybe a million leaving at least some money in stocks and have all of your future contributions go to equities. That way you've taken a bunch off the table but can still enjoy some gains in the market over the next 50 or so years.
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Old 02-08-2013, 03:42 PM   #12
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I have always said, only take the risk, you need to take, no more.

Saying that, there is market risk, interest rate risk, inflation risk, so pick your poison.
Longevity risk, marriage risk, divorce risk, health risk, global economic meltdown risk and most importantly asteroid impact risk.

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Old 02-08-2013, 03:46 PM   #13
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You could always cash out maybe a million leaving at least some money in stocks and have all of your future contributions go to equities. That way you've taken a bunch off the table but can still enjoy some gains in the market over the next 50 or so years.
I think a version of this makes sense (maybe cash out half and then split future contributions into equities and fixed income, or something like that), given OP's feeling about his risk level.

And nice going to have that 7-figure nest egg already!
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Old 02-08-2013, 03:58 PM   #14
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Originally Posted by RetirementColdHardTruth View Post
I know cashing out now will only give 1% growth if I am lucky. But eventually we have to return to the norm.

Thought and Comments?
How long is eventually and what if inflation outpaces the return to normal interest rates?
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Old 02-08-2013, 03:59 PM   #15
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'Having already won the (investing) game' seems to be taking on a unintended new meaning for some, making the leap to ZERO equity a little too easily. It's an important concept, but without quantifying what it means, it's not of much use IMO. It doesn't necessarily mean NO allocation to equities for most conceivable withdrawal rates (WR). It DOES mean why take any more risk than your portfolio & spending require.

To illustrate (the numbers are NOT absolute by any means) using the 30-year horizon chart and article below from Wade Pfau (who I would consider a great but moderately conservative source), even at 3-4% withdrawal rates, the lowest probability of failure is NOT at 0% stock allocation.
  • At a 4% WR, historically the lowest probability of failure occurs at 40% equity. Note the probability of failure for ZERO stock allocation is a (very high IMO) 28% or so.
  • At a 3% WR, historically the lowest probability of failure occurs at 20% equity. The OP mentioned a 3.2% WR.
    • One could argue these are respectively the lower % limits for equity allocation for those who 'have won the game.'
It may be down at a 1-2% WR equity allocation no longer matters, and there are probably studies on lower WR's, but I haven't seen them. But given the current very low rates/yields on all bonds & cash equivalents, WRs may have to be even lower than history would suggest.

So if you want to hold a very low or zero stock allocation without reducing your probability of success, you'll have to (substantially) lower your WR, which means a (much) larger $ portfolio and working relatively longer and/or spending (much) less in retirement. IOW, you have to choose a lower WR line on the chart below.

FWIW...

Rethinking Safe Withdrawal Rates
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Old 02-08-2013, 04:08 PM   #16
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My AA is close to 50/50. Short term I see more risk in equities, long term I see more risk in fixed income. I am not doing anything rash one way or the other.
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Old 02-08-2013, 04:34 PM   #17
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Originally Posted by AWeinel View Post
Another thought is to just go more conservative. Don't bail on equities completely, just reduce that portion of you AA. You are so young - if you are lucky that portfolio has to last another 40 years. That is a long, long time.
Agree and that is what I have done.
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Old 02-08-2013, 04:41 PM   #18
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Sounds good. I only have one advantage. I am closer to Social Security. Good luck I think you can do it.
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Old 02-08-2013, 05:22 PM   #19
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I remember reading a study (Bernstein?) that showed 100% fixed/cash had more risk over time than the same portfolio with 25% equities. I think Benjamin Graham also recommended no less than 25% equities.

Anyone remember the guy who posted here who got out of the market in 2008 and missed the bull run. I don't think he posts any longer.
+1
This would be my strategy if I was pessimistic or wanted to be very conservative. Something along the lines of Vanguard Wellesley.
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Old 02-08-2013, 05:44 PM   #20
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I am fairly conservative with my stash, but I live off my pension and do not have to be aggressive. Sounds like you would be a good candidate to shovel the max 10k a year into both IBonds and EE Bonds for the next 20 years. EE Bonds by law mature at 20 years with your principal doubled. That equates to over a 3.6% annual return if held the full 20 years. Would make a nice supplemental part of your portfolio, over a period of time.
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